In health policy, bad ideas never go away. Case in point is the proposal in California to require that health plans spend at least 85% of premium revenue on provider payments. Specifically, as part of his $12 billion Stay Healthy California package of reforms, Governor Arnold Schwarzenegger proposes to set a new minimum medical loss ratio for health plans.

In a nutshell, a health insurer’s medical loss ratio (MLR) is an accounting construct and relative differences from one health plan to another has absolutely nothing to do with affordability of premiums, access to care, quality of care, patient satisfaction, adequacy of provider networks, or virtually anything else of interest to policy makers.

Further, it is based on a staggering array of faulty assumptions about health care delivery, insurance markets, and the uninsured, and ignorance of the difference between price and value. And artificial medical loss ratio standards result in many unintended consequences, including less competition, fewer consumer options, pushing more people into taxpayer-financed Medicaid and SCHIP, and restricting resources needed to improve quality and reduce medical errors.

The medical loss ratio is an accounting monstrosity that enthralls the unsophisticated observer and distorts the policy discourse.

Juxtaposition of low medical loss ratio with forprofit status has fed the flames of HMO bashing but is completely without substance.

Thanks to the hard work of Secretary Kim Belshe and her excellent team, Governor Schwarzenegger’s health reform initiative has many components worthy of serious consideration. However, further regulation of medical loss ratios – a long discredited idea that will only hinder the Governor’s coverage objectives – is not one of them.

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The Piper Report blog on healthcare business and policy covers issues in Medicaid, Medicare, and the Affordable Care Act, with articles, interviews, resources, primers, book reviews, and more. Edited by Kip Piper, CEO of Medonomics.